Alliance Resource Partners Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Alliance Resource Partners LP First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Senior Vice President and Chief Financial Officer, Kerry Marshall.

Operator

You may begin.

Speaker 1

Thank you, operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its first Quarter 2023 financial and operating results, and we will now discuss those results as well as our perspective on Current market conditions and outlook for 2023. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward looking statements subject to a variety of risks, Uncertainties and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. While these forward looking statements are based on information currently available to us, if 1 or more of these risks or uncertainties materialize Or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected.

Speaker 1

And in providing these remarks, the partnership has no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise, unless required by law to do so. Finally, we will also be discussing certain non GAAP financial measures. Definitions and reconciliations of the differences between these non GAAP financial measures And the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which has been posted on our website With the required preliminaries out of the way, I will begin with a review of our results for the Q1, Then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his comments. But first, let me briefly share how incredibly grateful I am for the opportunity to step into the role of Chief Financial Officer. I've called Alliance home for the past 34 years, having joined our predecessor company in 1989.

Speaker 1

Since then, I've served in a variety of roles within Corporate Finance and Marketing and I uniquely understand what makes this partnership great And I see tremendous opportunity for continued value creation as we build upon Alliance's strong financial operational foundation Now turning to the quarter, Let me start by recognizing the dedicated efforts of our entire team that delivered the impressive Q1 results we are going to talk about today. The strong 2023 quarter performance was led by record coal sales price per tonne sold, which rose by 43.6 percent resulting in total revenues in the 2023 quarter increasing by 43% $662,900,000 compared to $463,400,000 for the 2022 quarter. The year over year improvement in realized coal prices reflects the positive impacts of our contracted order book. Sequentially, coal sales price per ton was up 0.7% or $0.50 per ton sold. Turning to our royalty segment.

Speaker 1

Coal royalty revenue per tonne was up 12.5%. However, lower commodity prices caused The average realized oil and gas sales prices to fall 26% per BOE versus the 2022 quarter. Sequentially, coal royalty revenue per ton was up 14.6% and average realized oil and gas Sales prices fell 18.2 percent per BOE. Coal sales volumes increased 3.8%, While coal production increased 0.7 percent to 8,500,000 and 9,200,000 tonnes respectively compared to the 2022 quarter. Oil and Gas royalty volumes increased 39.5% on a BOE basis to new record highs, While coal royalty tons sold declined 8.9% year over year.

Speaker 1

It is important to note that we recast historical periods within our Oil and Gas Royalty segment to include the JC Resources LP Minerals Interest Acquisitions that closed during the 2023 quarter as if we rather than JC Resources had acquired assets in 2019. Segment adjusted EBITDA expense per tonne sold for our coal operations was $39.66 An increase of 23.7% versus the 2022 quarter, primarily due to inflationary pressures throughout the year. On a sequential basis, cost per tonne were slightly lower. Our increased operating expenses in the 2023 quarter compared to the 2022 quarter We're also impacted by increased sales related expenses due to higher sales price realizations and higher labor related expenses, Maintenance costs and materials and supplies costs. During the 2023 quarter, we had 3 longwall moves, Including 2 at our Tunnel Ridge Mine, which is an extremely rare event for us.

Speaker 1

These long haul moves along with 2 prep plant fires that were Contained and extinguished quickly were some of the operational challenges that occurred during the quarter. Our net income and EBITDA rose sharply in the 2023 quarter, increasing 4 0 These increases reflect higher sales volumes in both coal and oil and gas royalties as well as higher price realizations In coal, which more than offset lower realized prices in oil and gas royalties, inflationary pressures and other cost impacts that I previously described. Now turning to our balance sheet and uses of cash. Alliance generated $153,400,000 of free cash flow before growth investments in the The sequential decrease was primarily attributable to tons sold being 9% lower due in part to strong shipments during the sequential quarter And a slight delay in our scheduled contract shipments for the 2023 quarter. Our total and net leverage ratios were 0.44 million including approximately $271,000,000 of cash on the balance sheet.

Speaker 1

The 2023 quarter was eventful for us on the capital allocation front, highlighting both the cash generating power of ARLP and the many options we have to attractively deploy it. During the quarter, we paid our quarterly distribution of $0.70 per unit, equating to an annualized rate of $2.80 per unit that we Our Oil and Gas Royalty segment continues to be a valuable growth vehicle for Alliance As we completed the $72,300,000 acquisition of oil and gas mineral interest discussed on the last call and then separately purchased additional oil and gas mineral interest in the Permian Basin for $2,800,000 during the quarter. In January, we announced that the Board had authorized a $100,000,000 unit buyback program. During the 2023 quarter, We deployed $18,200,000 to purchase 860,000 units, leaving us with $81,800,000 of remaining authorization on our unit repurchase Finally, in March, we opportunistically purchased $26,600,000 of our outstanding 2025 senior notes in the open market slightly below par. We intend to prioritize additional purchases with available cash flows this year and next.

Speaker 1

And as of yesterday, May 1, We now can call all or any part of our senior notes at par one of several options we will consider. So like I said, a busy quarter for capital allocation. The slowing of the economy and the mild start to winter reduced Overall demand for both coal and natural gas in the United States during the 2023 quarter. Coupled with continued growth in domestic natural gas production, Natural gas prices dropped significantly both sequentially and relative to the year ago quarter. Lower natural gas prices affected coal burns due to more competitive gas fired dispatch options for some of our customers and to a lesser extent reduced realized pricing in our Oil and Gas Minerals segment.

Speaker 1

Despite these near term challenges, we remain optimistic 2023 will be another record year Turning to our updated guidance detailed in this morning's release. Lower natural gas prices have resulted in some movement in the timing of contracted domestic deliveries and a shift in the mix between export and domestic markets. At the end of the 2023 quarter, our committed tonnage for 2023 was 34,300,000 tonnes or approximately 93% of our anticipated sales tonnes at the midpoint of our guidance range. Of that total, 4,200,000 tonnes are currently committed to the export markets. As we discussed during our call last quarter, We anticipated that most of the sales activity for our unsold coal for 2023 would occur in the back half of the year and that remains the case today.

Speaker 1

We do now expect that most of this available tonnage will be supplied to the export markets as domestic opportunities appear more limited Due to the mild winter weather and current utility inventory levels, as the summer peak demand season plays out, we expect normal buying patterns to return. Sales pricing is anticipated to be lower than where we thought at the beginning of the year, so we have Chose to modestly adjust our outlook for average coal price realizations for 2023. We continue to anticipate ARLP's overall coal sales volumes in 2023 to be in a range of 36,000,000 to 38,000,000 tons 2023 total coal price realizations per tonne sold are now expected to be in a range of $65 to $67 per tonne, A decrease of $2 per tonne from our previous range driven by lower pricing expectations for our uncontracted tonnage position. On the cost side, a laser focus on execution is helping offset the inflationary factors experienced in 2022. But we still anticipate labor pressures, higher maintenance, materials and supplies costs and higher sales related expenses throughout 2023 compared to On our last call, we stated that we expect segment adjusted EBITDA expense per tonne to be higher during the first half of twenty twenty three compared to 2022 levels before moderating in the back half of the year and that outlook still holds.

Speaker 1

For the 2023 full year, Segment adjusted EBITDA expense per ton is now anticipated to be in a range of $39 to $42 per ton, A decrease of $0.75 per tonne at the midpoint from the prior guidance range. And finally, as it relates to our Oil and Gas Royalty segment, Our initial 2023 guidance reflected the acquisition of mineral interest and 2,682 net oil and gas royalty acres in the Permian Basin For cash purchase price of $72,300,000 which closed during the 2023 quarter. Recent performance on all of our acreage Has exceeded our initial expectations, leading us to increase the midpoint of full year guidance for oil and gas volumes on a BOE basis by approximately 9 The remainder of our guidance ranges remain essentially the same as previously discussed with only minor adjustments in certain categories. With that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Speaker 2

Thank you, Carrie, and good morning, everyone. Before I start, I would like to express my appreciation to Brian Cantrell For his dedication to me and our partnership over the past 2 decades. I can tell Brian is already enjoying his retirement He sent Carey and me an e mail this morning after we posted our earnings release, which he said outstanding Q1. Congratulations. I'm sure you'll do well on the call today.

Speaker 2

So many of you know Cary, who has been by my side for nearly 3 decades. And I'm so appreciative of him enthusiastically agreeing to step up and assume the role of CEO. Kerry, I welcome you to the call and I think it's time to get ready. Yes, you're ready to go? Yes.

Speaker 2

So like Carrie said earlier, I also want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication Co sales volumes, record realized coal prices, record royalty oil and gas volumes Our teams on creating long term value for all of our stakeholders. Overall, this winter season was a mild one for our markets in both the United States and Europe, which makes it easy to forget the impact that severe weather events like December's winter storm Elliott Can have on our nation's energy security as well as the importance of having a reliable, diverse, affordable energy mix. It is during these extreme weather events that renewable resources as well as natural gas are frequently unable to adequately respond at the times they are most needed. Deserve margins in Energy Security in many regions of the country and in Europe are already tight. And as economies continue to recover and advance initiatives to increase electrification, the demand and stress on the grid We'll likely be even more magnified going forward.

Speaker 2

There is critical need for a diverse mix of energy sources for decades to come. And time and time again, we have to remind stakeholders that the speed of transition away from all fossil fuels As advanced by the Biden administration, it's moving way too fast, it's not practical and will lead to energy insecurity if they keep trying to prematurely shutter fossil fuel power plants. Turning to our current outlook, Kerry did a good job outlining our views on the current weakness in domestic coal demand caused by lower natural gas prices and how our guidance was adjusted as a result. As he stated, we remain optimistic 2023 financial results will be at record levels. Even though there is uncertainty caused by rising interest rates impacting the U.

Speaker 2

S. Economy and recent mild weather and lower natural gas prices that soften the near term domestic utility markets, We expect export demand to be sufficient to allow us to increase sales compared to last year. Relative to pricing, domestically, the market views the weakness in natural gas prices as temporary condition. As evidenced by the current forward curve rising steadily to over $3.50 per MMBtu by From a pricing perspective in Europe, mild weather caused API2 thermal delivered prices that peaked near $2.70 per ton In November, to a pricing range today in the $125 to $150 per ton range. I will emphasize that even in the face of this decline, seaborne thermal coal prices for our key markets are still an attractive option for our tonnage.

Speaker 2

We are fortunate that our robust cash flow generation positions us to continue improving our balance sheet and pursue attractive investments that are intended to meet the evolving energy needs of tomorrow. We are not just a coal company. Our successful investments in oil and gas minerals interest in the last several years along with the additional growth opportunities within our new ventures activities We serve. ARLP has long standing relationships with electric utilities, regulators and other customers that Position us to be a reliable energy partner of tomorrow and benefit from any changes to the U. S.

Speaker 2

Power grid, creating additional avenues for growth. As I have said many times before, we do not view our future energy needs as a country as an either or solution, but rather an and solution. In closing, I am proud of ARLP's impressive first quarter results and excited about the opportunities in front of us. Our operations are running well. Our coal contract book is heavily committed at attractive levels and our financial position has never been stronger.

Speaker 2

Looking forward, we believe RLP is well positioned to deliver solid growth and attractive cash returns to our unitholders in 2023 beyond. That concludes our prepared comments. And I will now ask the operator to open the call for questions.

Operator

And at this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Nathan Martin with The Benchmark Company. Please proceed with your question.

Speaker 3

Thanks, operator. Good morning, Joe. Kerry, congrats on the quarter and great to hear you on the call, Kerry.

Speaker 1

Thank you, Nate. Thank you.

Speaker 3

You guys built a little bit of inventory in the Q1. I guess, first, was that expected? Were there any logistical challenges to speak of? And then how should we think about that sales cadence over the next 3 quarters, both domestically and in export side and maybe when those inventories could draw back down. I know You guys had previously signaled the higher production and shipments in the back half.

Speaker 3

I think part of that was a bump from Gibson. So Assuming that's still the case, but just any additional color would be helpful. Thank you.

Speaker 2

Yes. On the inventory, it was within our plan. So as we move towards more export tonnage, we have secured the infrastructure, The capacity at the ports to be able to have our coal stored to be ready for vessels when they come in. So based on the size of the vessels, which are larger obviously than the railcars. Now that does require when we have shipments toward End of the quarter to have to build our inventory to meet the shipping schedules of these export movements.

Speaker 2

And so there was a couple of vessels that We had planned to ship in the Q1 that we're going to ship in early Q2 and that's just a logistical timing issue. So I think as far as what our plan was, the inventory was pretty consistent with what we were thinking was going to be. But for those 1 or 2 day delays in shipping of those export vessels. And as far as our production, it continues to be as Planned, I think we have delayed the hiring for the 2nd shift of the 5th unit at Gibson County. We're going to wait and see exactly where the market develops in the second quarter, Where we do anticipate based on internal inbound calls we're getting from customers both in the export market and the domestic market That there will be opportunities in the back half, but rather than hire those people effective April 1 like we had originally planned, we delayed that To the Q2 to probably after miner's vacation, and then we'll wait and see.

Speaker 2

If We do have the ability to produce tons on weekends to meet that demand. So a lot of our production demand just specific to that one unit We'll be determined based on our outlook at the mid year and as we see where the weather is and what the gas prices are and what the

Speaker 1

Thanks for that.

Speaker 2

Our sales are committed. I mean, our sales are continuing to be Targeted at the same range that we mentioned in the prior quarter. At this moment in time, we're very comfortable that we'll be able to hit those targets, hit The midpoint of our range that we have in our guidance for you.

Speaker 3

Great. Appreciate That color there, Joe. That sounds like really just as expected timing wise, it's had a vessel slip, but that's already shipped. So that's good to hear. If I look ahead at your updated committed and price tonnage for 203024, it appears totals are Actually a little bit lower versus where they were last quarter.

Speaker 3

Looks like driven by lower domestic tonnage assumption there. Could we get some more color around that change? Maybe any additional thoughts on potential domestic deferrals?

Speaker 2

Yes. So in our contracts, our utility customers do have some Flexibility to either flex up or flex down their committed tonnage. When they do that, it Basically carries forward, so it doesn't really release those tons from the contract. It's just a deferral into a subsequent period. So with the natural gas prices being where they were and therefore More of a demand issue that the utilities were projecting in the Q1, they did several of the utilities did flex down under their contracts.

Speaker 2

That has opened the door for us to just ship more tons in the export market, which In total, actually is a higher price than we would have gotten had they taken the tons under the domestic contracts. So in other words, the export price netback is higher than the tons that these utilities elected To flex down in this quarter for some parts of the 2023. So that's why there was a change in the mix of the contracted tons for the calendar year 2023.

Speaker 3

Got it. And that's great to hear that Actually able to flex up to a better margin. I guess along those lines, where are your export netbacks today with API2 around $135

Speaker 2

So when you look at that and add in what we have still a few tons that we can sell in the met market. I think the total netback will be somewhere in the same range as what we've guided as to our average sales price for the year In that $65 to $67 range.

Speaker 3

Great. Very helpful. And As we look ahead to 2024, how do we think about potential coal shipments? I mean, domestic demand seems like it could be under pressure. You guys have highlighted the desire to pivot to the export market a little bit.

Speaker 3

I know you've asked this in the past, but how much could you ramp export sales to offset any potential pressure on the domestic side? And then what's the potential to offset possible Lower coal operations EBITDA with continued growth in your oil and gas royalty segment.

Speaker 2

So as we look at the market and we look at our contract book, Most of our contracts are still with customers that have been long term customers for hours. So we would expect those contracts that do roll over into 2024 that expire that we will be able to place those tons with those customers. Since the end of the quarter, we have reached an agreement on one of our contracts that's 1,300,000 to $1,600,000 depending on how the flexing goes on those contracts for A committed term of 18 months with the option to the utility to extend that beyond that for The term yet that would be at least 6 months, if not another year or a year and a half Under that contract, prices that continue to give us comfort that we will be able To maintain our profit levels and profit margins to a level that's a very attractive level Compared to our historic run rates, I think that as far as the export and then in addition to that specific contract, there are 2 to 3 other Customers that have announced RFPs, so they're going to be in the market this quarter to start placing tonnage.

Speaker 2

Most of those solicitations have been for at least a minimum of 2 years. One of them basically asked for bids For a period up to 5 years. So we are continuing to be very confident that the demand for our product It's going to be stable in the domestic market for the next 3 years for sure based on our conversations with our domestic customers. On the export side, we're planning to ship 6,500,000 or so in 2023. Our highest level historically was around 12.2 or something, I believe.

Speaker 2

Correct. So we could double that volume if necessary, If the domestic market doesn't show up, we continue to believe that the export demand We'll be strong in 2024 comparable to what it is in 2023. The one issue that could change that is back to what happens with Russia, Ukraine situation and How will Russian product be moving throughout the international markets If there's a change with the sanctions, etcetera, that are impacting their shipments today and reducing their shipments, Because right now, based on the sanctions they have, we think there's a floor on the price The export product because at these levels, Russia is not making any money and they need that cash flow for the strength of their economy.

Speaker 3

Got it. Appreciate that. I'll go ahead and leave it there and jump back in the queue. Thank you for the time, guys. Yes.

Operator

Our next question comes from the line of Mark Reichman with Noble Capital Markets. Please proceed with your question. And Mark, your line is live. I'm not sure if you're on mute.

Speaker 4

Good morning. I was just wondering if you could provide a little more visibility On the comment on the several domestic customers that were seeking the sizable commitments for coal deliveries in 2024 2025, Because I know as Nathan alluded to the 2024 committed in price kind of actually went down a little bit. So just what are the dynamics in the market right now? And when do you kind of expect those customers to really kind of step up? I think you said that some of those would be 2 year contracts.

Speaker 2

Yes, like I mentioned 2 or 3 of those, I know 2 for sure, there may be a third one That has indicated that they will be out seeking coal for those time periods in this current quarter that we're talking. There will be others that will come out in the Q3. Again, based on our customer conversations, there are Sufficient coal plants that will continue to run and will continue to be needed in the states where they operate Due to the capacity constraints in those states, they have to have the coal plants running no matter what the gas price is to meet their load. And with electrification in these states growing due to The growth and anticipated in a lot of these battery factories and also EVs that are Continuing to ramp as well as other factors in a growing economy that will benefit from the infrastructure bill, The CHIPS Act, the Inflation Reduction Act, we anticipate the electric generation will grow over the next decade for that matter. And as a result, they're going to need to keep these coal plants Either running and or those that remain that are trying to fill the void for some that have closed at higher capacities.

Speaker 2

So even though there may be some plants that go offline, we believe there's sufficient capacity with the current plants that we anticipate that will be open through 2,000 2,035 that demand will be at a level set for us as a low cost producer And a reliable producer that we anticipate, as I said, at least the next 3 years is that we can see that Our production and sales should be at levels where we are currently, if not, maybe pick up a little higher depending on the export market. So there are attempts by the Biden administration to put different regulations On our customers to try to convince them to do to close plants prematurely. One of those rules is A Air Transport Rule, which the EPA, as you probably know, went in and denied Numerous states almost overnight basically saying that they denied their state plans as being inadequate And therefore requiring them to comply with the federal plan that would be more stringent. And Yesterday, we got some good news from coal producers' perspective and in a nation's perspective where the 5th Circuit Put a stay on those rules. We believe that the rules that the Biden administration are pursuing To try to fundamentally change the coal industry and the electric generation industry are a direct violation of the West Virginia law or Judgment that the Supreme Court passed or rendered last year and We believe these coal plants are going to stay open.

Speaker 2

So that would be even a higher boost to our forward Consideration for what the demand will be, but that's the way we see the demand picture. Weather is always a factor that is unpredictable. So I can't really comment on that as to what the weather is. And the economy, you help me. On the one hand, you've got a Fed trying to restrict Production and growth and on the other hand you've got the administration trying to give away a lot of incentives to incentivize growth.

Speaker 2

And so I'm not sure where this economy is going to play out as far as the timing of Energy consumption, but we're fortunate to have a solid relationship with our customers That are going to maintain and keep their plants open for the next decade and we've got a Favorable relationship with them that I'm confident that we will continue to be their supplier of choice and allow us to Maintain our production and sales at current levels for an extended period of time.

Speaker 4

And just the second question I had was, Revenues came in pretty much in line with our expectations. Operating expenses were actually lower. And just looking at your guidance, You kind of trimmed the coal sales price per ton sold. You also trimmed the segment adjusted EBITDA expense per ton sold. So kind of what do you think are the biggest pieces to watch on that operating expense line?

Speaker 4

And how do you see that evolving For the remainder of the year?

Speaker 2

Everything ties back to inflation. So we have seen Our supply costs sort of peak and start declining in several key areas. The one area that is holding firm is labor. We're continuing to have difficulty finding people. We also see competition from the infrastructure bill and some of the growth that is occurring Because of some of these subsidies that I talked about earlier, so there so what we're seeing in our areas of operation that There continues to be solid opportunities for our employees or for workers to work.

Speaker 2

Whether we can get people in the workforce to meet those jobs or whether we're going to have Continue to have a shortage of workers. That's the one area that I would say that's hard to predict and we're not Looking at that going down, but on the supply side, the other Issue that could be a variable factor is what our oil price is going to do. And are they going to go to $100 or are they going to go $60 that's another you see analysts projecting different numbers that we're hedged on diesel for this year. So we should not be impacted by the diesel costs for the remaining of the year, but That would be an issue going into next year depending on where diesel prices go. So those would be the main things.

Speaker 2

Supply chain, we're in a lot better position this year than last. When you look at supply chain, Tends to increase your costs somewhat because of the need to potentially buy some more Items that and then have storage costs for those items, etcetera, that increase your costs. So we're seeing supply chain be Normalize for the materials and supplies we need to run our business. So that's another factor that impacts our costs. But the material ones are wages and I'd say oil prices and steel prices, but they've come down.

Speaker 2

So and other consumables have come down.

Speaker 4

Okay. Well, thank you very much. That's really helpful.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Speaker 5

Good morning and thank you. With the average selling prices in And Appalachia going up a little bit and Illinois Basin going down a little bit. Can you talk just a little bit about what drove kind of that dislocation there?

Speaker 2

Well, they serve different markets. One, I think that You've got our Met Tiki mine serves both the metallurgical market as well as the steam market and that Benefits from the met market being at a higher sales point and stable for us. Our MC Mining product is also a very attractive market or product for the export market and demands The premium is really not priced off natural gas prices. And our Tunnel Ridge operation in Appalachia is basically sold out. So they haven't really had any impact on having any open tonnage Into the market relative to natural gas prices.

Speaker 2

Whereas in the Illinois Basin, we had some excess supply where we did in fact have to sell some Product that reduced prices compared to prior periods or prior year, I guess it was.

Speaker 1

I think the other important point that Joe is alluding to there is if you look at a mix issue in the most recent quarter, Tonnore Ridge did have 2 longwall moves during the quarter. And so when you look at from a volume perspective, our MC Mining and our Medtiki operations did have a little higher percentage going in there. And so when you look at that from both Revenue per ton as well as cost per ton, it does get viewed a little bit in the existing quarter because of those two factors. If you look going forward, Tunnel Ridge, like I mentioned, had 2 longwall moves. Their next longwall move is not until December.

Speaker 1

And so I think what you'll see going forward is More of a normal mix and a bigger mix in relationship to Tunnel Ridge overall. And so you'll see it both on the sales price and the cost side going We've tried to kind of account for that in our total guidance ranges going forward on both the revenues and cost side as well.

Speaker 5

Understood. That's very helpful. I also noticed on your guidance that you increased your acquisition Gas royalty, about $30,000,000 based on anticipated ground game acquisitions. Is there any sense of the pacing for that Acquisition?

Speaker 2

We sort of Plans to be sort of pro ratable over the year, but it will be totally dependent on the opportunities that present themselves. So it's hard to predict exactly what it's going to be. Look, the way we planned it in our planning was to do it on

Speaker 1

And I think as you look at the Q1, you can see the ground game was at 2,800,000 For the Q1 and so like Joe mentioned, I think the opportunities will play themselves out over I know there is quite a bit of activity in terms of what they're looking at. And so as we look at the full year guidance, we still feel very Comfortable in terms of being able to transact on that ground game. But like Joe said, it's going to be a little lumpier than the way we Originally planned it and will likely come in different spurts throughout the quarters.

Speaker 2

There was the earlier question on what we anticipated our growth would be in that Segment, so I don't think I answered that question. So but we are committed to continuing to invest in that segment, Effectively redeploying what their prior year EBITDA is. So as we look into The balance of this year and then going into next year, we would expect to continue to be investing sizable dollars into that segment.

Speaker 5

That's very helpful. Thank you. And one more if I could. Just with The potential for the U. S.

Speaker 5

Dollar to keep weakening, how does that impact any outlook you have on export sales?

Speaker 2

It obviously improves our opportunities and it affects on what our Competition is. So it's most of the contracts are priced

Operator

Our next question comes from the line of David Marsh with Singular Research. Please proceed with your question.

Speaker 6

Hi, good morning. Congrats on the quarter, guys. Thanks for taking the question. Thank you, David. Just wanted to start with just a quick question on the oil and gas royalty side.

Speaker 6

It looks like the Dollar price per BOE was down a good bit sequentially. Could you just discuss that a little bit? I was just a little surprised by that given that oil has kind of hung out in the $70 range for the most part. And Just curious what drove that reduced number and what that number might look like going forward for the Q2?

Speaker 1

Yes. I think as you just look at it, we don't hedge our Oil and Gas or Oil and Gas royalty side of it. And so it's just dependent upon where the pricing measures are for the product during that period of time. And if you look just sequentially quarter over quarter in terms of our realizations, it was 9.7% lower on the oil side of it and 65% lower on the gas side of it. As you look into the Q4 of last year on the gas side, by way of example, you had pricing in excess of $5 and as you kind of move back into where our netbacks were in the Q1 and look at where those realizations were, The actual netback ends up being under $2 for us over on the gas side of it.

Speaker 1

And so it's just a matter of what the commodity price index is are doing at that particular point in time. And that's the result of the different flows related to those commodity price indexes.

Speaker 2

Yes. It's more of just that component of natural gas, even though it's a smaller percentage than oil, it's still a percent that Does impact the total price.

Speaker 6

Right. Okay, understood. Yes, I just as I was reading through it, it said 75% oil And I was just a little surprised. The realization was so low, but I appreciate that.

Speaker 1

No, that's right. I mean, when you look Sequentially, our oil price realization is down about 10%.

Speaker 6

Got it. And then with regard to the debt side of the balance sheet, Congrats on the repurchases of the open market below par. That's a great win for the company and for unitholders, I believe. Thank you. But I just was looking at the balance sheet, so sequentially your debt was higher.

Speaker 6

Is that as a result of the acquisition?

Speaker 1

No, Ed. It's not really a result of the acquisition. We just redid our credit facility that we closed in January. And as a Part of that new credit facility, it had 2 components to it. It was a $500,000,000 credit Facility in total $425,000,000 of that was a revolver and $75,000,000 of that was a term loan.

Speaker 1

And when we entered into that credit facility, the term loan component was an important part. We felt like it made sense To have a term loan component and basically we've got some capital expenditure needs within our Coal operations that we announced related to Riverview just in terms of some extensions into some new reserve areas And by entering into that term loan component, it matched up what the capital needs were going to be associated with that. So we elected to enter into into term loan facility associated with that. So that's why it's higher quarter over quarter. It's just related to that term loan component.

Speaker 1

The repurchases that we did, as you mentioned, were on our senior notes That are due in 2025.

Speaker 6

Right. Okay. That makes sense. I'm sure the banks appreciated you locking into some amount of borrowing right out of Right out of the gate. And then just the last question, if I could circle back and kind of Piggyback on the last caller, with regard to the acquisition side, I mean, can you just talk about the environment and what you're seeing in terms of Opportunities being presented to you, are you continuing to see kind of mostly opportunities in places like the Permian or have you And the search beyond that and is it again still primarily around oil and gas assets as opposed to anything else?

Speaker 2

Yes, there are opportunities presented to us in all the basins That we evaluate, but our primary focus has been on the Permian, Both the Delaware and the Midland Basins. So that's Where our focus will be now, again, we're willing to look at other basins and we evaluate those, But most of the things we prioritize currently as being attractive to us are in the Permian.

Speaker 6

I was just curious as the whether or not you folks might be kind of Interested in exiting positions in the Haynesville given the weakness in that gas, which might present a really interesting opportunity?

Speaker 2

As I mentioned, we're evaluating opportunities in all basins. So we're not exclusive to 1. And so we look at the capital we've got available to us and then we try to assess The return opportunities and try to prioritize where we feel like we can have the best long term investment in Right. The opportunities being presented and the ones that we're looking at right now, they're more Permian based. That doesn't mean that There won't be some new ones that come in that we look at that the price expectations could be met to where we could take advantage of the lower price today.

Speaker 2

We're not finding too many people that want to lock in at these low gas prices when they're trying to sell their properties.

Speaker 6

Right. Okay. Last one for me. Terry, just Quickly, I noticed your interest income increased nicely in the quarter. Could you talk about what you're doing with the cash in order to generate some Incremental interest income and just how liquid those investments are?

Speaker 1

Sure. Yes, interest income was up on the quarter. It's just A matter of where interest rates have been going, most of the cash that we have And the balance sheet today is invested in money market accounts. So it's all very liquid. And As you know, short term money market accounts have been increasing with the increase in interest rates over the period of time.

Speaker 1

We do have A modest amount of our overall cash that's on more bank balance sheets That may earn a little bit lower rate than what you get on existing money markets today. But out of our total, roughly 75% to 80%

Speaker 6

Great. Thank you guys for sharing.

Speaker 1

Thank you, David.

Operator

Our next question comes from Nathan Martin with Benchmark Company. Please proceed with your question.

Speaker 3

Hey, guys. Thanks for taking my follow ups. If I just look out maybe over the next few years, Do you guys see any big changes related to your domestic customer base, maybe with regulations on the horizon, anything like that? And what percentage of your domestic business is recurring at this point if you have that number? And then as we look at the export side, You mentioned you secured some additional capacity at the ports there.

Speaker 3

I think Joe, you said you expect to export around 6,500,000 tons this year, but had maxed out Over 12,000,000 historically, do you have the capacity to get close to that 12,000,000 ton number now if the demand is there or are there other items you guys would have to address first?

Speaker 2

We have the capacity. Obviously, we don't have the production, but we don't have that. Our unsold position There's only a couple of 1000000 tons. So for this year, so we would have the capacity From a logistics standpoint, they'd be able to ship at that rate if we elected to do so. And I think as far as looking at our customer base, We don't really see any substantial changes that are on the horizon.

Speaker 2

There are some customers that in their IRPs They are looking at retirements in the 20 28 time period that could tweak what our mix is among the various Customers, but as I said earlier, even with some of those closures, the other plants that they remain To keep open, they assured us that they are still going to need coal volumes pretty much consistent with what they've been taking Because they would be utilizing the remaining coal plants at higher capacity factors. So for the next 5 years, we don't really see any Shifts in their customer mix.

Speaker 3

Great. Appreciate that. And then, Carrie, I know you mentioned the expectation to maintain the current $0.70 per unit quarterly distribution throughout this year. But Any thoughts on where that distribution could go looking forward? Joe, I think you previously mentioned a target coverage ratio of 2.2x to 2.5x.

Speaker 3

Does that still hold true? And then where do potential unit repurchases kind of fit into the capital return equation?

Speaker 1

Yes. I think just in terms of distribution coverage, what you talk about beyond 2023, that's still where our view is in that 2 to 2.5 times range in terms of distribution coverage going forward and that's where we would tend to focus. Obviously, we haven't provided detailed guidance On any of that end of 2024, typically we'll do that as we get closer to the end of the year, but that gives you a pretty good sense as to what we would look for distribution levels going forward.

Speaker 2

Yes. I think the stock buyback, I think our primary focus right now would be on Buying back our bonds. As we look at our credit agreement and what the underlying Covenants are under that agreement. There is an expectation that we will retire those bonds within a certain time period, which it makes sense for us to do anyway, given the REIT borrowing cost of trying to go back and replace those bonds. And I believe we mentioned that as of May 1, we have the ability and flexibility to either Continue to do what we've been doing, buy them in a market or we can redeem those at par Under our current credit agreement, yes, under our senior notes credit agreement.

Speaker 3

Great. Thanks again for the time and thoughts guys and best of luck for the rest of the year.

Speaker 1

Appreciate it, Nate.

Operator

And we have reached the end of the question and answer session. And I'll now turn the call back over to Kerry

Speaker 1

Thank you, operator. And to everyone on the call, we appreciate your time this morning as well And also your continued support and interest in Alliance. Our next call to discuss our Q2 2023 financial and operating results This is currently expected to occur in late July, and we hope everyone will join us again at that time. This concludes our call

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Earnings Conference Call
Alliance Resource Partners Q1 2023
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